How does business interruption insurance work, and is it worth it?

Have you been recommended or considered business interruption insurance (B.I)?

There are many misconceptions that need to be demystified when it comes to business interruption insurance. Firstly, how does it work? When does it commence after an incident? Is it as expensive as some may think? Read on as I share some helpful advice if you’ve been considering Interruption Insurance for your business.

What is Business Interruption Insurance?

First, let’s explore what interruption insurance does for your business and how it works. Remember that this is general advice only, as every business and situation is unique. Please get in touch with a qualified broker if you would like assistance with your business.

B.I. covers businesses for lost income and extra expenses incurred due to an unexpected disruption to their everyday operations.

In Australia, B.I. is typically offered as part of a commercial property insurance policy. However, it can also be purchased as a standalone policy.

The policy covers a wide range of events that may interrupt business operations. Events can include natural disasters, fires, theft, and other unforeseen circumstances covered by the policy.

The coverage provided by B.I. in Australia can vary depending on the policy and the insurer. Generally, the policy will cover lost income and extra expenses incurred by the business during the period of interruption. There are limits to the cover, which are specified in the policy. The policy may also cover costs incurred by the business to minimize the impact of the interruption. For example, this could cover costs associated with relocating the business or renting additional equipment.

In Australia, B.I. is an essential investment for all businesses, particularly those that rely on their operations to generate income.

Without this insurance, businesses may face significant financial losses, severely impacting their viability and long-term prospects.

It is important to note that B.I. policies in Australia typically have exclusions and limitations. The coverage provided may need to be increased to cover all losses incurred by the business during an interruption. Therefore, businesses must review their policy and consult with an insurance professional to ensure they have the right coverage.

What happens if my business has been impacted by an incident? 

Initially, there is a waiting period between when the business interruption occurs and when the insurance coverage begins. The waiting period can range from immediately after the event to a few days; this depends on the policy terms. 

Once the waiting period has elapsed, the B.I. policy indemnity period will begin. 

What is a Business Interruption Insurance indemnity period?

A B.I. indemnity period is the length of time that the insurance policy will cover lost income or profits, typically measured in months.

For example, a busy seaside cafe has a B.I. policy with a 12-month indemnity period. One day, an uncontrollable fire destroys its kitchen, causing the cafe to shut down for three months. The policy will cover lost income or profits for up to 12 months from the date of the fire. If the cafe can reopen before the end of the indemnity period, the coverage will end once the business is fully operational again or when the indemnity period expires, whichever comes first.

Reviewing the indemnity period in a business interruption insurance policy is essential as policies vary. 

What is the true cost of business interruption insurance? 

The cost of B.I. in Australia can depend on a variety of factors. This includes the size of the business, the level of coverage required, the location, and specific risks faced by the business.

Generally speaking, B.I. can be a type of insurance coverage that is more costly, particularly for businesses with higher risks. The cost of the policy can also depend on the length of the waiting period, the indemnity period and the specific coverage provided.

The cost of B.I. is typically a fraction of the potential financial losses a business could face during an interruption. For this reason, it is generally considered to be a worthwhile investment for businesses of all sizes, particularly those that rely heavily on their operations to generate income.

Consult an insurance professional to obtain a quote for B.I. coverage and determine the appropriate coverage level for your+ needs. It’s essential to carefully review the terms and conditions of the policy to ensure that the coverage provided meets the needs of the business and that there are no unexpected exclusions or limitations.

What types of businesses should have business interruption insurance? 

B.I. is a vital coverage option for a wide range of businesses across different industries. Generally speaking, any business that relies on its physical location, equipment, or other assets to generate income should consider having business interruption insurance. Some examples of businesses that may benefit from this coverage include:

  • Retail: Retail businesses that rely on foot traffic and in-store sales could experience significant financial losses if their operations are interrupted due to an unexpected event. 
  • Manufacturing: Manufacturing businesses that rely on specialized equipment and machinery to produce goods could face significant financial losses if their operations are interrupted due to equipment breakdown or other events. 
  • Hospitality: Hospitality businesses, such as hotels, restaurants, and cafes, are particularly vulnerable to unexpected events that could interrupt their operations, such as fires, natural disasters, or other events.
  • Healthcare: Healthcare businesses, such as hospitals, medical clinics, and dental practices, are also vulnerable to unexpected events that could interrupt their operations. 
  • Professional services: Professional services businesses, such as law firms, accounting firms, and consulting firms, typically rely on their physical location and equipment to provide services to clients.

It is important to note that the specific coverage needs of a business can vary depending on various factors, including the size and type of the business, the location, and the particular risks it faces. Business owners should consult with an insurance professional to determine the appropriate level of coverage for their specific needs.

Our Thoughts on Business Interruption Insurance 

Ultimately, as the business owner, you have the final deciding factor as to whether or not you believe B.I. is worthwhile for your business. Whilst not every single business requires it, more often than not, most businesses do need it. 

It would be best if you weighed up the decision as to whether or not you would be financially capable of overcoming an interruption to your business that won’t significantly impact your financial future. 

If you would like to speak to one of our professional insurance brokers, simply book a call today.

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